Unfortunately, stock market crashes are a fact of life. Indeed, there’s been over 20 of them since October 1929. But given this ever-present risk, what should investors do? And with both of the UK’s principal stock market indices booming, could this be a potential warning sign?
Let’s take a closer look.
Climbing higher
It’s easy to think that with the FTSE 100 and FTSE 250 close to their all-time highs, that a stock market crash is on the cards. However, in reality, it’s events on the other side of the Atlantic that are likely to determine what happens here.
But it’s a similar story in the US. The S&P 500 set a new high on 6 August.
Nothing to see here?
However, in my opinion, there’s plenty of evidence to suggest that – dare I say it – there’s no immediate prospect of a crash. Why?
Although the global economy isn’t exactly going gangbusters at the moment, things have been worse. Indeed, gold — often seen as a ‘safe haven’ during difficult times — has fallen back more than 20% from its January high.
Importantly, the world’s banks appear to be well capitalised at the moment. And, generally speaking, corporate earnings are healthy. Also, the difference between short-term and long-term US bond yields, believed to be a reliable predictor of trouble ahead, appears to be in line with historical norms.
Yet, there are frequent predictions that the AI bubble’s about to burst. And corporate (and government) debt levels remain a concern. Margin debt – money borrowed by investors to buy financial assets – is going up.
Margin debt is the highest it has ever been… There’s a lot of margin debt you don’t see because it’s not called margin debt. It’s called other things… some hidden, some public.
JP Morgan chief executive Jamie Dimon
Expect the unexpected
But even though there’s nothing I can do to prevent a stock market crash, I can take a few sensible precautions, just in case the worst happens. That’s why I’m trying to keep my portfolio as diversified as possible. I’m also holding more cash than normal because, as devastating as they can be, crashes also deliver some excellent buying opportunities.
They can present a second chance to buy stakes in high-quality companies at a knock-down price. You know the ones I mean. Those that you decided not to buy only to see their shares rally strongly.
What I’m doing
As well as this, I’m also buying some defensive stocks like pharmaceutical giant AstraZeneca (LSE:AZN). With the demand for its drugs largely unaffected by the economic cycle, its earnings tend to be stable, even during difficult periods.
